Tables turn on the crowded trade

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The recent
fateful Volkswagen short shows how risky it can be to follow
the herd. But why do so many hedge funds own stock in the same
companies?

By Britt Erica Tunick

When Porsche's attempted takeover of Volkswagen sent VW
shares soaring in October, hedge funds that had been shorting
the stock took one of their biggest hits of the year. Not
simply a bad trade, it was another harsh reminder of the
downside risk when multiple hedge fund managers pile into the
same names.

For years, the tendency of hedge funds to flock to the same
trades was closely watched by investors looking to hang onto
the coattails of savvy managers. But now stocks most heavily
owned by hedge funds have been tanking, and some investors have
begun using hedge funds' choices as contrarian indicators.

The shift began in the summer of 2007, when quantitative
hedge funds that crowded...

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